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'Best Practices' In Adapting To Sarbox Emerging

In addition to the Northeast Chapter’s very active program schedule in the region, we are part of the larger national organization (American Corporate Counsel Association) that does, among other things, interesting policy work for in-house counsel. ACCA National has been very involved in commenting on regulations under the Sarbanes-Oxley Act (‘Sarbox’) as it affects the practice of law for in-house counsel.

ACCA’s general counsel, Susan Hackett, has become one of the nation’s leading experts in this area. ACCA has held several focus groups with general counsel and other senior in-house practitioners around the country this year to discuss how they are dealing with the issues arising from Sarbox.

Sarbox And You

I would like to summarize for you some of the thinking that has come from these gatherings and, in particular, share some of Susan’s advice on the key issues relating to Sarbox affecting in-house counsel. (Readers can find Susan Hackett’s complete article — “Five Practical Tips For In-House Counsel In Dealing With Sarbox” — in the “important documents” section of New England In-House’s website,

Based on an informal survey of chief legal officers earlier this year, ACCA believes that they were spending almost 60 percent of their time focused on issues related to the new rules under Sarbox. Clearly, many in-house counsel have spent a significant amount of time over the past year dealing with governance issues, such as improving compliance systems, and interpreting and preparing for the implementation of Section 307, the Securities and Exchange Commission’s regulation covering attorneys.

We are all familiar by now with the new SEC rules ( regulating the conduct of attorneys practicing before the Commission. The SEC has also proposed a new rule ( that would create an 8-K public reporting requirement by a company’s board of directors, triggered by a lawyer’s mandatory withdrawal from representation of that company in the event of uncorrected client actions. You are invited to visit ACCA’s executive summary ( for an overview of the rule and the alternative proposal.

You may also visit and to read both sets of ACCA’s comments submitted to the SEC on the proposed rules.

Day-To-Day Impact Of Sarbox

The questions many in-house lawyers are asking themselves now are: What about changes to my daily practice as a result of all these new rules? How will Sarbox affect the every day relationship between in-house counsel and outside counsel in the shared professional and service commitment to our corporate clients?

Section 307

Much ink has been spilled over these new rules. I don’t attempt to summarize them in substance here. Suffice it to say, the SEC’s final rules and still-pending “noisy withdrawal” proposals could have an enormous impact on the roles of chief legal officers, their staff, and outside lawyers, as well as on the inside-outside counsel relationship.

This means that chief legal officers will likely ask outside counsel to join them for detailed discussions — perhaps leading to formal programs and written policies — to decide who will be designated to play what roles, how reports of allegations will be taken up the ladder in a coordinated and appropriate fashion, who will communicate about reports and investigations to senior management and the board, and how to handle issues that raise questions of reporting out (rather than just up).

Reporting Up The Ladder

While Model Rule 1.13 and the SEC rules clearly anticipate a working knowledge by all lawyers of up the ladder reporting, not many outside counsel have had a lot of practical experience in the matter. In-house counsel know that reporting up the ladder is a very delicate process involving a number of people in the company at different levels, a bit of creative intelligence gathering, negotiating internal politics, and so on.

If your outside counsel regularly works directly with your senior management, perhaps your law department would simply prefer to inform your outside counsel that any intransigence by non-legal managers should be reported to the CLO or other senior counsel, and that the in-house staff will take it from there.

Outside counsel is probably focusing very hard on their newfound knowledge of Sarbox responsibilities (and liabilities). You might want to talk with them about how you want them to proceed, should reporting up the ladder be necessary, especially if a matter needs to go to the company’s board of directors.

Preferred ‘Independent’ Counsel

A number of law departments are working with their senior management and board to designate law firms that can be used in the event an independent outside opinion is needed. Boards, especially, are making an art form of the practice of hiring independent advisers of all kinds.

But when it comes to outside law firms, some are concerned that they’ll have a situation of “dueling counsel,” with each board member hiring (and perhaps not properly supervising) their own personal favorite firm. That could mean potentially disastrous and expensive results for the company.

One solution is to work with senior management and the board to create a panel of partners at preferred outside firm(s) who will be consulted when independent legal advice is needed. The CLO may prearrange some of the terms of retention should a matter arise.

These firm(s) will not be used for other matters, thus ensuring that they will be a truly independent voice on any matter brought before them, and, perhaps most important, preserving the firm’s ability to stay out of the witness box and assert privilege on those matters.

What About The Privilege?

Post-Sarbox, a new focus has emerged on lawyer-client communication policies, document retention and destruction policies, use of shared document repositories, e-mail policies, and so on. No one has the single solution to how these matters should be resolved, but some best practices are evolving.

First and foremost is a renewed focus on written records. No CLO suggests improperly destroying documents or evidence, but everyone is talking about simply not putting as much in writing, especially when it comes to e-mail. More in-house lawyers are just going down the hall to have a conversation with someone, rather than recording it for posterity.

Given the potentially large civil and criminal liabilities that can attach to lawyers who don’t comply with Sarbox, some in-house counsel are now conflicted about whether to fill their files with “cya” memos. Susan Hackett advises that she doesn’t have a ‘silver-bullet’ solution to this concern, except to note her personal belief that if you find yourself or your services in the sights of an investigatory telescope, your files probably aren’t going to save you. “Reasonable” behavior will be judged by the public’s level of outrage and 20/20 hindsight.

Those CLOs with document retention programs are in a quandary as to whether they will ever again be able to destroy documents on a regular schedule without fear that such acts will later be seen as destruction of evidence, even in the absence of a suit or investigation.

Questions about written records are faced not only by the internal department, but also by law firms. Do you know your outside law firm’s e-mail and document retention policies? Do their policies mesh with your company’s policies? If not, Hackett advises, “you’d better find out.” All of these communications issues will have a significant impact on the assertion of privilege when the time comes.

Conducting An Audit Of Policies

A number of CLOs, especially those in smaller departments, are working with their firms to conduct a “legal health” audit of sorts. The idea is to have the firm come in and check out corporate policies and procedures, governance documents and structure, compliance initiatives, employee awareness of legal standards, and specific compliance with the formal requirements of Sarbox. This is not a cheap or painless process, but for those CLOs without the resources or expertise to know if they’ve properly prepared their client, this is probably money well invested.

Those interested in having an audit done should look for a law firm with experience. You don’t want to pay for the firm’s learning curve on these issues. And your audit may benefit from the best practices and ideas gleaned from other clients of the firm, especially if they are in your industry. The audit also presents the perfect opportunity to plan the coordination of some of the policies and procedures discussed above.

Practice Tips

Here are some more practical tips from Susan Hackett at ACCA:

  • Make sure that your law firms (and members of your department) understand the proper use of the “corporate Miranda” warning issued to employees under scrutiny for possible misdeeds. Likewise, make sure that your firms understand your policies on joint representations when individual executives are named as co-defendants.
  • Take another look at your law firms’ internal policies that may come into play in representing your company if sensitive matters arise under Sarbox. For instance, if asked to give a legal opinion on a matter that is crucial to a deal (essentially the equivalent of a legal certification of the company’s compliance with relevant laws and internal policies), would the firm be unwilling to do so post-Sarbox, or only under certain conditions?
  • What discussion of inside-outside relationships is complete without at least a mention of fees? Some firms have been charging premium prices for Sarbox-related work, and some of them are worth it. The silver lining for those in-house worried about their budgets is that every firm with expertise in this area has issued a blizzard of free advice in the form of advisories, white papers, and free programs. Make use of these wonderful resources. And check out your firms’ (and their competitors’) websites. Many have created excellent Sarbox and corporate responsibility pages filled with resources, memos, references and other helpful material.
  • You may want to look at your firms’ internal ethics structure, as well. Do they have regular training on professional responsibility issues? Do they have designated ethics experts to help lawyers understand how to navigate tricky ethical situations? Are the associates working on your matters well supervised and given practical training? When a Sarbox matter arises, you need rock-solid confidence that your outside firm knows how to respond professionally and practically.

    The basics of working with your law firms since the passage of Sarbox have not changed. You may be spending more time and money on your outside counsel beyond your regular, anticipated budget, but your relationship with those firms may become stronger than ever.

    Just make sure that you are using your firms to do more than put out fires or revamp your governance structure and executive compensation packages, and are engaging them in a cooperative effort to safeguard your company from future violations. Avoid the uncoordinated and frantic scramble to respond that a crisis situation can bring.

    While the SEC’s rules only apply to issuers and their lawyers, some of these suggestions apply equally to corporate counsel who work in private companies. As always, you should temper any checklists and suggestions to respond to your department’s unique structure and your client’s unique needs.

    I would like to take this opportunity on behalf of the ACCA NE Chapter Board of Directors to extend to all of our members and fellow in-house associates, a healthy, safe and relaxing summer! Although the NE Chapter is in effect on hiatus during the months of July and August — event-wise that is — please know that the services of ACCA National ( and our chapter administrator, Stacey Cronin ([email protected]) are at your disposal year-round.